The world economy

Boom or gloom?

The global economy is looking surprisingly perky—unlike the dollar

STOCKMARKETS are sliding again; the gold price this week hit a seven-year high of $400 an ounce; and the dollar slumped to a new low against the euro. “So what's new?” you might ask: the world economy clearly remains fragile. What is new, however, is the recent batch of better-than-expected figures on economic growth around the globe. Not only has the American economy rebounded, but Japan and the euro area are also now growing again, albeit more slowly. The news from some emerging economies is even more bullish. Many economies in Asia and Latin America enjoyed their fastest growth for years in the third quarter. Adding it all together, the world economy as a whole probably enjoyed its fastest growth for two decades (see article). So why have financial markets got collywobbles?

One explanation is that share prices had risen ahead of themselves. Another might be worries that America's rebound is unsustainable, being based on a seemingly reckless fiscal policy, unusually low interest rates, and a consumer borrowing binge. If these sources of growth dry up, one of the few remaining policy tools is the dollar. This week it fell to another all-time low against the euro. Foreigners are less eager than they used to be to finance America's current-account deficit, and in an election year America seems prepared to do anything to support jobs, including letting the dollar tumble and erecting protectionist barriers.

Many American economists and policymakers have long argued that the current-account deficit does not matter. Thanks to America's superior economic performance, they say, foreign investors are eager to buy dollar assets. But that no longer seems true. Net inflows of investment into American bonds and shares plunged from $50 billion in August to only $4 billion in September, the lowest level since the crisis caused by the collapse of Long-Term Capital Management in October 1998. The very suggestion that foreigners might not continue to buy dollar assets in future was enough to make some investors sell this week. A cheaper dollar will help to reduce America's external deficit, while at the same time supporting growth. The risk is that if the greenback falls too fast, bond yields could rise, choking off recovery.

That is why Washington cannot afford careless talk or gestures, such as its announcement this week that it plans to impose new quotas on imports of Chinese textiles. Following America's action earlier this year on steel tariffs, this sparked concerns that the government is desperate to protect jobs at any cost. And that cost could be high if it tries to hobble China.

America has long been the primary engine of the global economy, but increasingly China and the rest of Asia have become a second important engine of growth. By some measures (based on purchasing-power parity) China has accounted for a slightly bigger slice of global growth than America in recent years. For many economies, exports to China have given a bigger boost to growth over the past year than have exports to America. In the past 12 months, China's imports have risen by 40%, America's by a paltry 2%. Japan's exports to “Greater China” (also including Hong Kong and Taiwan) are now bigger than those to America.

If the overhang of consumer debt does eventually cause America's recovery to sputter, then the world economy will be better off if China's economy remains robust. Aeroplanes are always safer with two engines than with one.